Why You Should be Investing in Women During this Downturn
Michelle Volz (MBA, MIT Sloan School) *[email protected]
Michelle Volz (MBA, MIT Sloan School) *[email protected]
Guest writer bio: Michelle is a Venture Fellow at DigitalDX ventures, a women-led fund investing in the future of medicine and digital health, and an investor in Portfolia’s FemTech Fund, an investment fund focused on emerging technologies, products and services improving women’s health and wellness throughout their lives. She is currently part of MIT Sloan’s MBA class of 2022 in the Entrepreneurship and Innovation track.
The looming recession is frightening, but also a time of opportunity. During the Great Recession spanning from 2007 to 2009, despite the economy experiencing a financial crisis, many large companies we know today emerged such as Uber, Slack, Credit Karma, Groupon, and Venmo to name a few.
But during this same time, the amount of investments in female founders was noticeably low. In 2008 for example, only 1.7% of venture capital invested in companies went to exclusively female founders. For companies that had a mixture of men and women, that number was only 6.4% While female founders had long struggled to get attention from investors, this period marked the start of a broad push for tracking and transparency.
Over the last decade, many initiatives were started to increase the number of female investors and entrepreneurs, though the growth has been slow. In 2019, the percentage of VC capital dollars going to female-only founding teams had increased to only 2.8%, with co-ed teams growing to 12.1%. However, the performance numbers of companies with a woman on their founding team points to a large opportunity. According to a prominent VC firm, First Round Capital, their own portfolio companies with female founders outperformed their male peers by 63% in creating value for investors. And according to a study by Boston Consulting Group, for every dollar raised, female-led startups generated 10% more revenue than male-led startups.
With these kinds of numbers, it’s surprising that the dollars invested in women isn’t higher. And with the current economic recession looming as a result of COVID-19, many fear that even the small progress that’s been made will slide backwards. “The economic fallout of COVID-19 could prove harder on women than men, especially if investors retreat into what they might perceive as safer and more familiar investments,” says Christine Tsai of the Venture Firm 500 Founders.
A Look Back
Despite low amounts of funding for women back in 2008 and 2009, there were some breakout companies with female co-founders that thrived. Companies such as Houzz, an online home remodeling marketplace, Kabbage, an online fintech company offering small business loans, and Gingko Bioworks, a synthetic biology company, all started during 2008 and 2009 and are now part of the coveted “unicorns” club for companies valued over $1 billion.
A few exclusively female founded companies also saw enormous success. Rent the Runway, a service creating an affordable way to wear high-end designer clothes, raised their Series A in July of 2009 and is now worth over $1 billion dollars. However, starting a company during this time was not without its challenges. Not only did the founders, Jennifer Hyman and Jennifer Fleiss, have to raise money during a recession, but they also had to raise in an environment where there were very few women investors they could raise money from. Says CEO Hyman, “What we often heard when we were going around and pitching in the early days… was ‘Well, let me ask my wife about this’… [I spent] over 50% of my pitch actually on things that, when I speak to a woman, it takes me five minutes” Now, their loyal and exclusively female customer base has helped the company’s seed investors see a 56x return.
The current COVID-19 recession could even be helpful for certain types of startups. Mariam Naficy, the founder of online design marketplace Minted.com, says the Great Recession actually helped her company get off the ground. “[The recession] was actually a very good time to start a business, because people started to really question if they really needed large institutions--those huge brands. People started thinking, well, maybe I want something smaller and more artisanal and affordable, actually. It was a consumer-perception shift that worked in our favor.”
As a second time founder, however, it was easier for Naficy to raise venture capital to grow her company. She had sold her first startup, Eve.com, for more than $100 million in cash. First time founders can face a harder time raising money, as investors value experience and a track record to help de-risk their investments. And unfortunately, as fewer women have started companies in the past, there aren’t as many repeat female founders to invest in.
Says Isabelle Phelps, an early stage investor in New York: "It becomes a bit of a self-fulfilling prophecy. It's easier to fundraise because other investors also value experience, increasing competition and de-risking future rounds. But this makes it even more important for investors to be cognizant of bias against first-time and underrepresented founders."
Present Day
While the percentage of VC dollars is still low, the percentage of VC deals made in female (co-) founded companies more than doubled from 2008 to 2019. Now over 20% of all investments go to companies with at least one female founder. However, there was a slight setback this year right before the pandemic began. According to Pitchbook data, VC deals with startups founded exclusively by women dropped to just 4.3% in Q1 2020 compared to 7.1% in Q1 2019. And some worry that these numbers will only get worse with the current environment since there are fewer female repeat founders than male ones.
Some female founders are saying their fundraising has completely stalled during this pandemic. M.H. Lines, founder of marketing automation company Automaton, said her investor meetings were canceled and investors seemed to be looking for reasons not to invest.
But this could be the case for many companies as investors try to navigate the changing landscape of the world. While some companies struggle to get funding, others are thriving. Peanut, a community app for women, has seen engagement and consumption grow by 30% and 40%, respectively, since the outbreak. They just recently closed their $12 million Series A.
Women are a powerful force in the economy and will face a disproportionate amount of challenges during this pandemic. These challenges will spark new opportunities, and those experiencing the challenges are best suited to drive toward a solution. Says Colleen Cutcliffe, CEO of Pendulum Therapeutics, “Very rarely is a man thinking, ‘I’m really worried about my bacterial vaginosis and what else could I do for my child that I’m carrying. That’s a problem women think a lot about, so a woman is more likely to start that company. Then you go to a bunch of investors who never thought about that problem.”
Seasoned investors know that investing in a diverse portfolio is the best way to maximize gains in the long run. As the world faces new challenges, new opportunities will emerge. Says Pam Kosta, CEO of AllRaise, “There's a lot of money to be made by investing in diverse founders and companies that build themselves with diversity in mind. Those companies are going to stand to do well, and the early movers who take advantage of that are going to reap the lion's share of rewards.”
Conclusion
While the tendency for some during a time of crisis is to be conservative, the most gains come from investing against the curve. 41% of today's unicorns were founded during the great recession of 2008-2009, but investment in women entrepreneurs was low. These numbers have improved, but this recession risks a backslide of female investment. Women drive 83% of all U.S. consumption through both buying power and influence, and returns from female-led companies have continued to prove lucrative for investors. This is not the time to back off on investing in women, rather it is the time to accelerate it.
But during this same time, the amount of investments in female founders was noticeably low. In 2008 for example, only 1.7% of venture capital invested in companies went to exclusively female founders. For companies that had a mixture of men and women, that number was only 6.4% While female founders had long struggled to get attention from investors, this period marked the start of a broad push for tracking and transparency.
Over the last decade, many initiatives were started to increase the number of female investors and entrepreneurs, though the growth has been slow. In 2019, the percentage of VC capital dollars going to female-only founding teams had increased to only 2.8%, with co-ed teams growing to 12.1%. However, the performance numbers of companies with a woman on their founding team points to a large opportunity. According to a prominent VC firm, First Round Capital, their own portfolio companies with female founders outperformed their male peers by 63% in creating value for investors. And according to a study by Boston Consulting Group, for every dollar raised, female-led startups generated 10% more revenue than male-led startups.
With these kinds of numbers, it’s surprising that the dollars invested in women isn’t higher. And with the current economic recession looming as a result of COVID-19, many fear that even the small progress that’s been made will slide backwards. “The economic fallout of COVID-19 could prove harder on women than men, especially if investors retreat into what they might perceive as safer and more familiar investments,” says Christine Tsai of the Venture Firm 500 Founders.
A Look Back
Despite low amounts of funding for women back in 2008 and 2009, there were some breakout companies with female co-founders that thrived. Companies such as Houzz, an online home remodeling marketplace, Kabbage, an online fintech company offering small business loans, and Gingko Bioworks, a synthetic biology company, all started during 2008 and 2009 and are now part of the coveted “unicorns” club for companies valued over $1 billion.
A few exclusively female founded companies also saw enormous success. Rent the Runway, a service creating an affordable way to wear high-end designer clothes, raised their Series A in July of 2009 and is now worth over $1 billion dollars. However, starting a company during this time was not without its challenges. Not only did the founders, Jennifer Hyman and Jennifer Fleiss, have to raise money during a recession, but they also had to raise in an environment where there were very few women investors they could raise money from. Says CEO Hyman, “What we often heard when we were going around and pitching in the early days… was ‘Well, let me ask my wife about this’… [I spent] over 50% of my pitch actually on things that, when I speak to a woman, it takes me five minutes” Now, their loyal and exclusively female customer base has helped the company’s seed investors see a 56x return.
The current COVID-19 recession could even be helpful for certain types of startups. Mariam Naficy, the founder of online design marketplace Minted.com, says the Great Recession actually helped her company get off the ground. “[The recession] was actually a very good time to start a business, because people started to really question if they really needed large institutions--those huge brands. People started thinking, well, maybe I want something smaller and more artisanal and affordable, actually. It was a consumer-perception shift that worked in our favor.”
As a second time founder, however, it was easier for Naficy to raise venture capital to grow her company. She had sold her first startup, Eve.com, for more than $100 million in cash. First time founders can face a harder time raising money, as investors value experience and a track record to help de-risk their investments. And unfortunately, as fewer women have started companies in the past, there aren’t as many repeat female founders to invest in.
Says Isabelle Phelps, an early stage investor in New York: "It becomes a bit of a self-fulfilling prophecy. It's easier to fundraise because other investors also value experience, increasing competition and de-risking future rounds. But this makes it even more important for investors to be cognizant of bias against first-time and underrepresented founders."
Present Day
While the percentage of VC dollars is still low, the percentage of VC deals made in female (co-) founded companies more than doubled from 2008 to 2019. Now over 20% of all investments go to companies with at least one female founder. However, there was a slight setback this year right before the pandemic began. According to Pitchbook data, VC deals with startups founded exclusively by women dropped to just 4.3% in Q1 2020 compared to 7.1% in Q1 2019. And some worry that these numbers will only get worse with the current environment since there are fewer female repeat founders than male ones.
Some female founders are saying their fundraising has completely stalled during this pandemic. M.H. Lines, founder of marketing automation company Automaton, said her investor meetings were canceled and investors seemed to be looking for reasons not to invest.
But this could be the case for many companies as investors try to navigate the changing landscape of the world. While some companies struggle to get funding, others are thriving. Peanut, a community app for women, has seen engagement and consumption grow by 30% and 40%, respectively, since the outbreak. They just recently closed their $12 million Series A.
Women are a powerful force in the economy and will face a disproportionate amount of challenges during this pandemic. These challenges will spark new opportunities, and those experiencing the challenges are best suited to drive toward a solution. Says Colleen Cutcliffe, CEO of Pendulum Therapeutics, “Very rarely is a man thinking, ‘I’m really worried about my bacterial vaginosis and what else could I do for my child that I’m carrying. That’s a problem women think a lot about, so a woman is more likely to start that company. Then you go to a bunch of investors who never thought about that problem.”
Seasoned investors know that investing in a diverse portfolio is the best way to maximize gains in the long run. As the world faces new challenges, new opportunities will emerge. Says Pam Kosta, CEO of AllRaise, “There's a lot of money to be made by investing in diverse founders and companies that build themselves with diversity in mind. Those companies are going to stand to do well, and the early movers who take advantage of that are going to reap the lion's share of rewards.”
Conclusion
While the tendency for some during a time of crisis is to be conservative, the most gains come from investing against the curve. 41% of today's unicorns were founded during the great recession of 2008-2009, but investment in women entrepreneurs was low. These numbers have improved, but this recession risks a backslide of female investment. Women drive 83% of all U.S. consumption through both buying power and influence, and returns from female-led companies have continued to prove lucrative for investors. This is not the time to back off on investing in women, rather it is the time to accelerate it.
